Lender wants to tighten screws on de­fault en­trepreneurs

The state-owned Small En­ter­prise Fi­nance Agency (Sefa) wants gov­ern­ment to in­tro­duce ces­sions to forcibly re­cover loans from de­fault­ing en­trepreneurs.

Finweek English Edition - - NEWS - ed­i­to­rial@fin­week.co.za By Andile Ntingi

the days of un­scrupu­lous busi­ness own­ers de­lib­er­ately duck­ing the re­pay­ment of loans to state-owned fund­ing in­sti­tu­tions are num­bered. That is if gov­ern­ment ur­gently heeds the plea of Thakhani Makhu­vha, CEO of Sefa, who is lob­by­ing for the in­tro­duc­tion of ces­sions to forcibly re­cover loans from de­fault­ing en­trepreneurs who won’t pay up – even though their com­pa­nies are gen­er­at­ing enough rev­enue to cover their debt obli­ga­tions.

“I am ap­peal­ing to the politi­cians to con­sider in­tro­duc­ing ces­sions to put an end to the prob­lem,” Makhu­vha told a packed SMME pol­icy meet­ing at­tended by min­is­ter of small busi­ness de­vel­op­ment Lindiwe Zulu.

A ces­sion is an ef­fec­tive in­stru­ment that pro­tects lenders from ruth­less bor­row­ers be­cause it forces bor­row­ers to give up the rights to re­ceive pay­ments from clients to the lenders.

Pay­ments from clients are paid to lenders first, then the lenders pay bor­row­ers the bal­ance af­ter debt has been set­tled, elim­i­nat­ing the risk of bor­row­ers van­ish­ing into thin air with­out re­pay­ing their debt.

Sefa pro­vides loan fund­ing to small-, medium- and mi­cro-sized en­ter­prises (SMMEs) and co­op­er­a­tives, a risky mar­ket shunned by the com­mer­cial banks due to a high de­fault rate and busi­nesses strug­gling to sur­vive more than a year af­ter birth.

That tra­di­tional lenders avoid this mar­ket is not with­out merit, given that money can quickly dis­ap­pear into a bot­tom­less pit – never to be seen again.

Be­cause they have ap­petite to lend into this risky mar­ket, state-owned lenders suf­fer mas­sive bad debt losses with 10% to 20% of their loan books go­ing bad.

Sefa is not the only lender that has been at the re­ceiv­ing end of the grow­ing cul­ture of non-pay­ment of loans, where bor­row­ers pre­fer to pur­chase ex­pen­sive lux­ury cars rather than hon­our their debt obli­ga­tions.

Mnce­disi Xego, founder and CEO of Royal Fields Fi­nance, a lender that pro­vides fi­nance to small busi­nesses and com­pa­nies that have been awarded ten­ders, has found pro­tec­tive mea­sures to deal with se­rial de­fault­ers.

His com­pany takes joint cus­to­di­an­ship of the bor­row­ers’ bank ac­counts so that when the money rolls in, Royal Fields takes what it is owed and the rest is paid to the bor­row­ers. The com­pany also uses ces­sions to hedge it­self.

“With­out this type of se­cu­rity, I doubt if any com­pany would sur­vive in this space. If you are le­nient, that’s when peo­ple dis­ap­pear and avoid pay­ing the loans.

“The cul­ture of non-pay­ment is making it dif­fi­cult for gen­uine en­trepreneurs to ac­cess fund­ing. The con­se­quence is that a lot of fi­nanciers are in­sist­ing on col­lat­eral. This be­hav­iour also pushes up the cost of fund­ing to cover the cost of non-pay­ment,” Xego ex­plains.

He also ar­gues that the non-pay­ment cul­ture is dam­ag­ing be­cause it has dev­as­tat­ing con­se­quences for cap­i­tal-starved en­trepreneurs who could be con­tribut­ing strongly to job cre­ation.

De­spite the risks, the likes of Sefa and Royal Fields of­fer small busi­nesses fi­nanc­ing prod­ucts such as bridg­ing loans, term loans, re­volv­ing loans, and work­ing cap­i­tal.

“It is com­mon knowl­edge that com­mer­cial lenders, banks in par­tic­u­lar, are re­luc­tant to ex­tend fi­nanc­ing to sur­vival­ist, small-, mi­cro- and medium-sized en­ter­prises and co­op­er­a­tives. In­vari­ably, th­ese en­trepreneurs and co­op­er­a­tives are con­strained by strict lend­ing cri­te­ria set by banks in this mar­ket seg­ment in view of the per­ceived risks in­her­ent in the busi­ness ven­tures,” says Makhu­vha.

In the case of Sefa, it pro­vides loans up to a max­i­mum of R5m and has ap­petite to pro­vide fund­ing to busi­ness own­ers op­er­at­ing in di­verse sec­tors of the econ­omy rang­ing from ser­vices (fran­chis­ing, re­tail, tourism), man­u­fac­tur­ing (agro­pro­cess­ing), con­struc­tion (small con­struc­tion con­trac­tors) and min­ing (small min­ers) to green in­dus­tries (waste and re­cy­cling man­age­ment as well as in­stall­ers or man­u­fac­tur­ers of LED lights, so­lar gey­sers and heat pumps).

In the past fi­nan­cial year, Sefa dis­bursed R1.3bn, 74% of which went to black-owned com­pa­nies.

The cul­ture of non-pay­ment is making it dif­fi­cult for gen­uine en­trepreneurs to ac­cess fund­ing.

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